Can My Business In Manhattan, NY Discharge, In Bankruptcy, Employees’ Claims For Unpaid Wages?

In general, yes. Employees’ claims for wages, salaries or commissions earned before the filing of a corporate employer’s bankruptcy petition are dischargeable, unless such pre-petition wage claims are debt for “willful and malicious injury by the debtor [the employer] to another entity [the employees] or to the property of another entity [the employees].” 11 U.S.C. § 523(a)(6).

The case law of the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) controls bankruptcy proceedings brought in, among other federal judicial districts, the U.S. Bankruptcy Courts for the Southern, Eastern, Northern and Western Districts of New York.  (The Southern District of New York encompasses, among many other boroughs, the borough of Manhattan in New York City.)  A Bankruptcy Court within the Second Circuit has held that a debtor employer’s mere failure to pay an employee’s pre-petition wages in connection with her employment is not “willful and malicious” within the meaning of the dischargeability exception set forth in 11 U.S.C. § 523(a)(6).

Specifically, in Orr v. Marcella (In re Marcella), 463 B.R. 212 (Bankr. D. Conn. 2011), an adversary proceeding within an employer’s bankruptcy case, the U.S. Bankruptcy Court for the District of Connecticut held that the plaintiff employee’s pre-petition wage claims against the debtor employer were dischargeable. The Marcella Court explained that “Although the Debtor [employer] may have breached an employment contract with the Plaintiff [employee] by failing to pay her wages that were due, ‘a breach of contract unaccompanied by tortious conduct . . . does not give rise to a Section 523(a)(6) nondischargeability claim.’ ” Marcella, 463 B.R. at 219.

To put it another way, unless, before the filing of the corporate employer’s bankruptcy petition in Manhattan, NY, an employee has obtained a judgment for wages, salaries or commissions owed based on findings that the employer acted either with personal malevolence or with conscious disregard of the employer’s duty to pay the employee his wages, it is likely that the employee’s pre-petition wage claim will be eliminated in bankruptcy. Compare Marcella, 463 B.R. at 215-223 with Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1203 – 1209 (9th Cir. 2001) (after a bench trial, a California state trial court had held the individual owner of a mortgage brokerage liable to his ex-employee for failing to pay commissions and vacation pay owed under the employment agreement between them, and had determined that the “[the individual owner] had the clear ability to make these payments to [the plaintiff ex-employee], but chose not to”; that instead of paying the plaintiff ex-employee and other employees the money owed to them, the individual owner diverted his company ‘s funds to his personal use; and that the individual owner’s behavior was willful and warranted imposition of punitive damages; in an adversary proceeding within the individual owner’s subsequent, Chapter 7 bankruptcy case, holding that the California state trial court’s judgment “arose from willful and malicious injury caused by the debtor’s tortious conduct” and “is therefore excepted from discharge under 11 U.S.C. § 523(a)(6)”) and Jiao v. Fan (In re Fan), Case No. 20-44317, Adv. Pro. No. 21-01037 (Bankr. E.D.N.Y. Jan. 3, 2024) (in adversary proceeding within individual’s bankruptcy case, the debtor individual, who was the owner and controlling person of a restaurant, scheduled the plaintiff employees to work, at the restaurant, no less than 11 hour shifts for six or seven days a week without paying the minimum wage or overtime, failed to provide the employees with pay stubs or minimum wage notices, and threatened the employees with violence; holding that the plaintiff employees’ pre-petition wage claims against the restaurant owner were debt for willful and malicious injury by the restaurant owner to the employees, and thus that the employees’ wage claims against the restaurant owner “are not dischargeable pursuant to Bankruptcy Code section 523(a)(6)”)

Claims for “wages, salaries or commissions, including vacation, severance, and sick leave pay” earned before the filing of a corporate employer’s bankruptcy petition fall fourth on the Bankruptcy Code’s list of priorities for payment. See 11 U.S.C. § 507(a)(4), 11 U.S.C. § 507(a)(4)(A). These fourth-tier priority wage claims are only allowed up to $10,000 per claimant. 11 U.S.C. § 507(a)(4).

Further, a fourth-tier priority wage claim must be for compensation earned within 180 days before the date of filing of the corporate employer’s bankruptcy petition or the date of cessation of the corporate employer’s business, whichever occurs first. 11 U.S.C. § 507(a)(4).

Call New York City Unpaid Wages Attorney David S. Rich at (347) 835-5688 to speak with a knowledgeable labor and employment lawyer about ensuring that your company complies with overtime pay and other wage and hour laws, or to retain a skilled overtime attorney to defend your company in unpaid overtime lawsuits or other wage and hour litigation.